Right Thinking from the Left Coast

Tag: Microeconomics

Rumors are that the President’s taxpayer-funded political speech State of the Union Address will focus on rising income and wealth inequality in the United States. As with almost everything this Administration does, I think this is misguided.

First, at least part of the problem of inequality is social. Poor people are much more likely to get divorced, much more likely to have children out of wedlock, much more likely to drop out of high school, much more likely to engage in criminal activity and more likely to have substance abuse problems. Wealthy people are far less likely to have those problems. The divorce problem is especially important because inequality is usually measured per household and having split households means split wealth. Inequality in America is as much a reflection of a social divide as it is an economic one.

Of course, it’s difficult to untangle social and economic problems: growing up in poverty can make it harder to persevere in school, for example. But I still think poverty is, to some extent, a symptom of larger social diseases. Treating those social diseases — through school choice, through ending the drug war, establishing free enterprise zones — would be a much more productive approach than throwing money at it.

But second, I think the idea of “inequality” is a fundamentally flawed way of looking at things. The problem with America is not that Bill Gates is making too much money. The problem is that millions of people are unemployed or marginally employed and that trillions of dollar of their wealth was eradicated by a government-supported real estate bubble (and trillions more will soon vanish in a government-supported education bubble). When people talk about “inequality”, that tends to devolve to the misguided idea of eating the rich. We should instead be focusing more on poverty, on unemployment and on education. Tearing down Bill Gates will help no one. We need to lift everyone else up so that they can aspire to be Bill Gates.

But how do we do that? Well, we can start by not following Democratic prescriptions. As I noted in an earlier post, Democrat-controlled California has the most massive income inequality in the nation, one so bad that pundits are calling it a “liberal apartheid”. Today, there was a report that the District of Columbia, an exclusively Democratic fiefdom, also suffers from catastrophic inequality, mostly because of the extraordinary gains in wealth for the areas in and around DC where government employees and contractors live and work.

And that’s the rub. Liberals think inequality is a result of not having a high enough minimum wage (and Obama, as Rich noted, just raised federal contract minimum wages by fiat). But we’ve had lower inequality with a lower minimum wage. California has a high minimum wage and massive inequality. They also think it’s a result of taxes being too low on the rich. But the rich are paying almost all the income taxes already. The lower classes pay payroll taxes, but almost no income tax. They think it’s because we’re not doing enough. But we’ve poured trillions into the War on Poverty (and, it should be noted, that many measures of inequality and poverty exclude this kind of federal aid. So liberals are ignoring the existing impact of anti-poverty programs in their call for more of the same).

Frankly, if you want to know why inequality is rising, look no further than the solutions Obama will propose tonight. Doubtless, we will get another “jobs bill”. This bill will shovel more money to rich connected friends of politicians while doing almost nothing to create sustainable job growth. He will doubtless push for a hike in the federal minimum wage, which will likely increase unemployment among the people who are the poorest. He will gloss over the federally-fueled housing bubble and bailout that poured billions into Wall Street while bankrupting the rest of us. He will doubtless ignore the regulatory capture that cripples small businesses while pouring wealth into those with armies of lobbyists. I am dubious that we will hear anything about the critical need to reform the tax and regulatory systems that are paralyzing our businesses.

In short, I think that Washington and the policies it has pursued for the last 15 years is the major contributor to inequality. And I think it is likely that we will hear tonight is a clarion call for more of the same. We will continue to push people down while claiming we’re helping them. We’ll continue to give money to special interests while pretending we’re fighting them. We will continue to do everything but the one thing government needs to do if it ever really wants to combat income and wealth inequality: